The decision to cancel permission for Alvarez to stay in the United States was an expected measured rejoinder to Venezuelan President Hugo Chavez, who had ruled out credentials for U.S. Ambassador-designate Larry Palmer, analysts said.

A more scaled-up response would have been a tougher stance on diplomatic relations between the two countries, taking them down the road to a diplomatic impasse with deeper implications, analysts said.

The U.S. measure was widely anticipated and Alvarez wasn't in Washington to receive the rebuff.

Washington's restrained response leaves the door open for normalcy to return to ties between the two countries, still major trade partners. Venezuela sells U.S. importers about 1 million barrels a day of its crude oil.

U.S. State Department spokesman Mark C. Toner told reporters: "We said there would be consequences when the Venezuelan government rescinded agreement regarding our nominee, Larry Palmer.

"We have taken appropriate, proportional and reciprocal action."

Toner said, "We believe it's in our national interest to have an ambassador in Caracas so that we can candidly express our views and engage with the government of Venezuela."

"There are tensions in the relationship," he added, but the Obama administration thought it "important to have appropriate diplomatic relations."

A day earlier Chavez had dared Washington to cut off diplomatic relations. Analysts said the Venezuelan leader appeared ready for a major deterioration in ties, seen as a likely populist prop in the government's continuing confrontation with Venezuelan opposition.

"If the [U.S.] government wants to expel our ambassador there, let them! If they cut off diplomatic relations, let them," Chavez said.

The crisis began after Palmer's comments -- critical of Chavez and Venezuela -- during a U.S. Senate confirmation hearing were aired in the media. Palmer's comments were meant for the public domain but received more publicity than usually anticipated for those hearings.

Conspiracy theorists quoted in the U.S. media said Palmer's pronouncements were likely fanned by Obama foes or congressional critics opposed to the ambassador's nomination.

Palmer told the Senate committee he believed Venezuela was allowing left-wing FARC fighters to find safe haven in the country and that Venezuela's military was under Cuban influence and suffering from low morale.

Neither comment was news or an earth-shattering revelation, analysts said, but both Chavez and opposing camps in the Palmer-as-envoy debate seized upon those pronouncements.

Analysts said that despite bitter controversy around Palmer, ties between Caracas and Washington were less volatile than in 2008-09 when Chavez mobilized his military, claiming Colombia and U.S. forces planned to invade his country. Both sides withdrew ambassadors between September 2008 and June 2009 after repeated Chavez attacks criticizing U.S. military presence in Colombia.

U.S. forces have been aiding a Colombian-led anti-narcotics operation that exposed links between FARC rebels, seen funding anti-Colombia guerrilla warfare and drug warlords on the cocaine trail to North America.

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